Netflix adds nearly 6 million subscribers amid password sharing crackdown in Q2

Netflix reported second-quarter 2023 earnings Wednesday, revealing paid subscribers increased by 5.89 million in the quarter ended June 30.

Analysts had projected the streamer gaining 1.769 million new subscribers in Q2 — the period in which Netflix began notifying customers in the U.S. and other countries that users on their accounts who live outside their households would need to be added as an “extra member” (or pay for their own subscriptions).

Netflix smashed Wall Street’s expectations by instead rising to 238.39 million global subscribers in Q2 compared with its 232.5 million total in Q1. That growth marks an 8% year-over-year increase in subs.

In a letter to shareholders accompanying the Q2 results, Netflix noted: “We anticipate Q3’23 paid net adds will be similar to Q2’23 paid net additions.”

The company didn’t quantify how much of the subscriber gains were due to the password-sharing crackdown, but said sign-ups were already exceeding cancellations for the paid-sharing program. “[W[hile we’re still in the early stages of monetization, we’re seeing healthy conversion of borrower households into full paying Netflix memberships as well as the uptake of our extra member feature,” the company said in the shareholder letter.

Netflix reiterated that “extra member accounts are not included in our paid membership count but add revenue” that is included in its average revenue per user (ARPU), which the company refers to as “average revenue per member,” or ARM.

Paid memberships rose by 1.17 million in the U.S. and Canada during the most recent quarter; by 2.43 million throughout Europe, the Middle East and Africa; by 1.2 million in Latin America; and by 1.1 million in the Asia-Pacific region.

Wall Street analysts had forecast earnings per share of $2.86 on $8.3 billion in revenue for Netflix, according to analyst consensus data provided by Refinitiv. Netflix reported diluted EPS of $3.29 on $8.2 billion in revenue, which marks 2.7% year-over-year growth in revenue. On the revenue miss, Netflix shares fell more than 6% in after-hours trading.

The streamer says it turned in a profit of $1.5 billion in Q2 with operating income of $1.8 billion. Free cash flow for the quarter stood at $1.3 billion. For Q3, Netflix is projecting revenue of $8.5 billion and a net profit of $1.6 billion.

Netflix raised its projection for free cash flow for the full-year 2023 to be at least $5 billion, up from $3.5 billion previously. The upward revision reflects lower cash content spend for the year than the company originally anticipated “due to timing of production starts and the ongoing WGA and SAG-AFTRA strikes.” That may create some “lumpiness” in free cash flow from 2023 to ’24, according to the company, but it added that “we plan to deliver substantial positive FCF in 2024” with a 1:1 ratio of cash content spending to content amortization.

Earlier Wednesday, Netflix confirmed it is eliminating its Basic plan, its cheapest streaming plan without ads, in the U.S. and U.K. in an attempt to boost customers on the ad-supported Standard With Ads, which the company first launched last November. In May, Netflix said it had signed up more than 5 million members for its ad-supported plans, with 25% of new subs taking the package.

“Our starting prices of $6.99 in the U.S. and £4.99 in the U.K. [for Standard With Ads] are lower than the competition and provide great value to consumers given the breadth and quality of our catalog,” a Netflix spokesperson told Variety.

Netflix executives will speak about the quarter in greater detail during a pre-recorded analyst interview scheduled to post at 6 p.m. ET. Variety